For a company that does half its business in the euro area, one could reasonably expect Logica to be fully conversant with the ongoing sovereign debt crisis.
On Wednesday morning the IT company has revealed the “pockets of weakness” first spotted in September (yes, that’s September 2011 ) have now turned into a gaping great hole (about the size of Europe).
As a result the company has announced an “accelerated restructuring” — management gobbledegook for a profits warning.
The Logica Board is today announcing a number of actions to reshape Logica for success in challenging times
Our orders performance on long term contracts remains strong. However it has recently become clear that many of our clients are delaying short term expenditure and reducing discretionary investments to weather an uncertain economic future. As a result, the pockets of weakness that we first saw in September have widened through the quarter. We now expect full year revenue growth to be around 3%, and underlying profitability in the range of £240m to £ 250 million (net of £25 million of previously announced restructuring charges).
Client conversations lead us to expect this trend to continue and recent market forecasts now predict GDP declines of 1% to 2% in our European markets in 2012. We are therefore accelerating the restructuring that we would otherwise have spread over the next two years. This will lead to charges in the current financial year of around £80 million related to restructuring of jobs and £13 million relating to property. We expect these measures to impact in excess of 1,300 jobs.
Oh dear, oh dear, oh dear.
If Logica didn’t see this one coming it begs the question of what exactly would make the board and its chief executive Andy Green sit up and take notice. A thermonuclear confrontation between China and the US perhaps.
Talk about being asleep at the wheel. And all of this might be funny — if more than 1,300 jobs weren’t at risk.
Equally as concerning is the fact that Logica has had to revist a number of multi-year contracts and has booked a provision as a result.
We have undertaken a thorough review of our contract portfolio. In particular, we have taken a more prudent view of a small number of long term contracts to reflect the more difficult economic outlook. We will accordingly take a one off charge of £39 million which will be incurred in 2011. Most of the charge reflects a change in provision for expected lifetime contract losses as a result of the likelihood of lower expected revenue on a small number of volume-dependent contracts with between four to six years still to run. The remainder of the charge arises from applying increased rigour to the achievability of cost transformation across the portfolio; this has been exacerbated by the economic outlook.
This is worrying on a number of levels, not least because Logica’s new FD, Himanshu Raja, was the man brought into clean up the mess at BT Global Services. One wonders what else he will find or what accounting methods he might ask the company to adopt.
Here’s Numis Securities on that topic:
Management accepts revenue recognition policies were not fully embedded everywhere, but says that the primary issue is lower volumes on volume-related contracts (i.e. the economy). At this stage the change does not look like fundamentally changing the group’s approach or prospects in outsourcing, but clearly there will be additional investor caution.
Anyway, the share price has plunged to levels last seen at the bottom of the bear market in 2009 following news of the accelerated restructuring. Meanwhile, analysts are pruning forecasts and warning of more bad news to come.
The risks to the business model that have concerned us are coming to the fore. Logica is taking an £80m exceptional, impacting 1,300 job (under utilised/wrongly skilled staff) and a £39m charge on long term contracts (we think reflecting over optimistic contract pricing). The company sees FY12E margins >6.5% which would equate to c£230m EBITA on c5% sales decline (FX and macro). This would imply EPS of c10p. Risks remain of more bad news to come, making it too early for us to turn positive despite the valuation.
Implications for overall guidance: Adding together lower EBITA and higher debt guidance, we view this as a hit of about 15% to consensus 2012 EV/NOPAT expectations.
This is another blow to management credibility, which is already at a low ebb. Based on new guidance and last night’s price the valuation is CY12 EV/NOPAT c.8.5x, PE c.6.7x, on earnings before bad stuff. This remains close to the valuation low from 2008/09. However it is hard to know how cheap the stock will need to get to find supporters.
Hard indeed. Perhaps a change of management might help, like at Pace.
Update: 9.26am (London time)
Talking of Pace, we wonder if this story from the Daily Telegraph is what finally did for CEO Neil Gaydon:
Neil Gaydon, chief executive, pointed out that the floods had impacted a large number of technology companies, and said the frequency of Pace’s profit warnings were a testament to its transparency.
“[There have been a lot] because we’re a really well run company so we can give a really clear view of where we are,” he said.
A spokesman added that Pace should be commended for correctly assessing the 2011 impact of the floods so fast.
Yep, he really did say that. As for the PR, what were they thinking.
Logica cuts full-year outlook – FT